Ring up China

05/05/2006 12:00 am EST

Focus:

Jim Trippon

Editor-in-Chief, China Stock Digest

For investors looking at China, Jim Trippon is a must-see in Las Vegas and his China Stock Digest is a must-read. He notes, "We have only seen the beginning of China's development as a world financial power." Here, he rings up a pair of Chinese wireless plays.

"There are many reasons to expect a bright future as a result of China's latest economic indicators. Last year industrial output rose by more than 16% and the overall economy surprised everyone by showing greater-than-expected growth of 10%. No one, not even China's Premier, predicted anything nearly as good this year.

"A great many pessimists previously diagnosed the Chinese economy as being hopelessly inflated. They dismissed the country's remarkable GDP growth as an illusion, created largely by an investment bubble. No question, investment is a factor, but soaring industrial production indicates fundamental strength in GDP.

"Meanwhile, retail sales within China jumped by 12.5% during the first two months of 2006 in a year-on-year comparison with the same period in 2005. As the people have become more confident about their economic prospects they have clearly started spending more. Fixed asset investment grew by an astonishing rate of 26.6% in the first two months of this year. The government is actively encouraging investment in roads, transportation infrastructure, power grids, power generation, real estate development, and factories. The push is clearly paying off.

"Some economists are reporting expectations of a slowdown in development later in the year, but the numbers we're seeing now indicate substantial momentum. We remind you that some pessimists have been predicting the collapse of Chinese economic expansion during every year for the past 25 years. As we China-watchers know, they have been wrong every year as the Chinese economy set a consistent growth rate averaging 10% every year.

"Meanwhile, our focus is exclusively on China-related stocks that traded on US exchanges via ADRs, as we are not yet comfortable recommending stocks on Chinese exchanges. Over 80 Chinese firms trade as ADRs in the US and most continue to show gains. Our survey of the big picture indicates that gains in many but not all sectors can be expected to continue for the foreseeable future.

"The two largest Chinese wireless firms are both on our buy list. China Mobile (CHL NYSE) has the largest wireless telephone subscriber base in the world, and it continues to grow exponentially. The company announced last month that its profit reached $6.66 billion in 2005, an increase of 28% over the previous year. China Mobile also announced that its operating revenue reached $30 billion 2005, an increase of 26%.

"More than 215 million people are currently subscribed to China Mobile and we believe that China Mobile still has plenty of room to grow its subscriber base and revenues with the introduction of 3G technology. In the volatile world of telecoms, we see this as a relatively low volatility; long-term growth play with an added dividend of 2.3% to sweeten the pot! CHL is a buy.

"China Unicom (CHU NYSE) stands second only to China Mobile in its size and population of wireless subscribers. In the world's largest cellular phone market, China Unicom has acquired more than 130 million subscribers. An astonishing 1.2 million subscribers signed up with Unicom in February alone. We expect China Unicom to continue to be a growing player in the mobile telephony and data transmission markets in the People's Republic of China.

"China Unicom's 2005 profits rose 9.7% as users sent more text messages and downloaded games from the Internet. Net income rose by $610 million. We believe that the relatively small risk of holding a position only in the number one service provider, China Mobile, could be managed even further with a prudent counterbalancing position in China Unicom."

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